The Swiss tax shakeup: What it means for Indian investors and professionals
- Switzerland’s decision to suspend the most-favoured-nation status for India could impact direct investments and employee stock options.
Last week, Switzerland suspended the most-favoured-nation (MFN) clause in its double taxation avoidance agreement with India. A major fallout of this is that beginning 1 January, taxation on dividend payments from Swiss entities to Indian investors has been doubled from 5% to 10%.
The changes could also have some implications for India-based employees of Switzerland-headquartered companies, freelancers working for Swiss companies, and people settled in India but earning a pension from Switzerland.
Mint breaks down the impact of the development.
Investors and employees with stock options
Switzerland’s suspension of the MFN status for India will mainly affect taxation of cross-border dividends.
“Earlier, dividends from Swiss-listed companies were taxed at 5% under the MFN clause. With its withdrawal, dividends will now be subject to the default rate of 10% (as per the India-Switzerland DTAA)," said Ajay R. Vaswani, founder, ARAS AND COMPANY Chartered Accountants.
In effect, starting 1 January, a higher 10% withholding tax will apply to Indian investors with direct investments in Swiss stocks, mutual funds, or exchange traded funds (ETFs).
This extends to Indian employees working for Swiss multinational companies who have been granted employee stock options, restricted stock units (RSUs), or other stock options by a parent company based in Switzerland.
However, the 10% withholding tax will apply only if the ESOPs result in dividend income and not when the ESOPs are sold.
Also read | Mint Explainer: Why Switzerland withdrew MFN status in its tax treaty with India
“If the employee receives dividends from the Swiss MNC shares (held directly or via ESOPs), the payout will face the 10% withholding tax. If the employee sells the ESOPs, any gains will be taxed as capital gains in India (not as dividends) and are not subject to Swiss withholding tax," said Vaswani.
Foreign tax credit (FTC) under DTAA can still be claimed later in India. Through FTC, investors can claim the tax paid in Switzerland to offset their tax liability in India when filing tax returns.
“To that extent, the development will not have a major impact for resident Indian investors, where they are able to claim full credit of taxes withheld in Swiss, i.e., 10%, starting 2025," said Janhavi Pandit, a Mumbai-based chartered accountant.
Dividend income earned on foreign shares is taxed at the tax slab rate in India. Hence, only investors who fall in a tax slab below 10% will be impacted.
Indian companies present in Switzerland could also face business losses in a particular situation, said Pandit.
“Where an Indian resident company offers dividend from (the) Switzerland company as business income (since its main business is of investing or foreign investment is contended to be strategic investment) and there is borrowing cost against investment in those shares, which is claimed as deductible, this may result in business losses (subject to other components in computation). In such a situation, foreign tax credit may not be permissible," Pandit said, adding that this was a specific situation that may need deeper analysis in most such cases.
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Freelancers and pensioners
There is no bearing of the suspension of the MFN status on Indian resident freelancers working for Swiss companies and those earning a pension from Swiss sources, as these are not classified as dividend income.
“If the freelancer is only receiving payments for services (salary, contract fees, or consultancy fees), those payments are considered business income or salary income, not dividends," said Vaswani. “If the Swiss company withholds any tax on the freelancer’s income, it would be under Swiss domestic withholding tax rules, which are separate from the DTAA provisions on dividends. The freelancer may still claim FTC under Section 90."
This applies to pensioners as well. However, Vaswani pointed out that if a pension payment previously benefited from MFN-based reduced withholding tax, it could now be taxed at a higher rate under Swiss domestic law.
“India taxes global income, so even after the pension is taxed in Switzerland, pensioners must declare it as income in India. (But) they can claim foreign tax credit for the tax paid in Switzerland," he said.
Pandit added that the changes are applicable from 2025 and, therefore, there will be no undue burden on investors for taxes already withheld.
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